Bob Rodriguez – We are Witnessing the Development of a “Perfect Storm” by Robert Huebscher

Before he retired, Bob Rodriguez was one of the best portfolio managers in the business, and he often went public with his iconoclastic, and often spot on, views. An interview with Rodriguez by Robert Huebscher at advisorperspectives.com:

Robert L. Rodriguez was the former portfolio manager of the small/mid-cap absolute-value strategy (including FPA Capital Fund, Inc.) and the absolute-fixed-income strategy (including FPA New Income, Inc.) and a former managing partner at FPA, a Los Angeles-based asset manager. He retired at the end of 2016, following more than 33 years of service.

He won many awards during his tenure. He was the only fund manager in the United States to win the Morningstar Manager of the Year award for both an equity and a fixed income fund and is tied with one other portfolio manager as having won the most awards. In 1994 Bob won for both FPA Capital and FPA New Income, and in 2001 and 2008 for FPA New Income.

The opinions expressed reflect Mr. Rodriguez’ personal views only and not those of FPA.

I spoke with Bob on June 22.

In a recent quarterly market commentary Jeremy Grantham posited that reversion to the mean may not be working as it has in the past. What are your thoughts on mean reversion?

There will be a reversion to the mean. We are in a very difficult and challenging time for active managers, and in particular, value style managers. Many of these managers are fighting for their economic lives.

Given that I am no longer involved professionally in managing money, I believe the standards in the industry are being compromised; monetary policy has so totally distorted the capital markets. You are now into the eighth year of a period that is unprecedented in the likes of human history.

The closest policy period to what we have now would have been between 1942 and 1951, when the Fed and Treasury had an accord to keep interest rates low. Interest rates were artificially held lower to help finance the World War II effort. With the renewal of inflation after the war, a policy war developed between the Treasury and the Fed on the continuation of a low interest rate policy. The Treasury-Fed of 1951 brought this period to a close. But that is the only time we’ve had a period of nine years of manipulated, price-controlled interest rates.

This was a historical policy I discussed with my colleagues upon my return from sabbatical in 2011: what could unfold were controlled, manipulated and distorted pricing that could disrupt the normal functioning of the capital markets. The historical cycles that Jeremy would be referring to that entailed a reversion to the mean could be distorted, for a period of time, by this type of monetary policy action.

But I do not believe the economic laws of gravity have been permanently changed.

Yes indeed, nature must be obeyed. I followed Bob Rodriguez when I was trading bonds and always found his comments insightful and usually right. Note his current equity allocation. To borrow from Game of Thrones: Winter is Coming.

Yes indeed, winter portends. The usual suspects will unite in attempting to place the blame, however severe said “season,” on Trump and his minions. I am afraid there is little evidence that there will be an effective response to said attempts.

I wish I had worked directly with him. He was one of two I really respected in the portfolio management business. The other was Jeff Gundlach, at Double Line, who has an incredible record. He’s on Zero Hedge once in awhile and he’s worth paying attention to.

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